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July 10, 2000

The End of CPM

If you're sad then it's time you spoke up too
     -“Out of My Head,” Fastball

It is easy to be disgusted by writers who make a point of mentioning something they predicted in the past in an effort to seemingly prove they have above-average prediction skills. So rather than suggest that I have been right in the past, and am somehow more right now, let me simply say that I am belligerently persistent on this one issue: I strongly believe that the majority of Web-based advertising will eventually be performance-based. The most common yardstick of Internet advertising--CPM, which measures the cost of advertising for every 1,000 "impressions," or viewings--will be left behind.

In May of 1997, under the title “New Media Update: A Tech Guy’s Perspective,” I wrote, “we predict ‘per-click’ and ‘per-sale’ ads will proliferate broadly on the fragmented Web." I reiterated the point in April and October of 1998 with "How to Succeed in Advertising." And if you think I haven't been insistent enough already, I can now say that I am shockingly confident that performance-based advertising will eventually dominate, not because I believe it, but because I see it happening in the marketplace every day.

After each of those articles, I received numerous flame mails from advertising and media company executives bemoaning my ignorance and complete lack of understanding of their market. They will likely do the same this time. The arguments are simple: "This is not the way things are done in our world...You just don't understand." However, rather than write to me, they should consider consulting the executives at Encyclopaedia Britannica and asking them how it felt when technology developments completely changed their market. Denial was an ineffective strategy.

Of course, one of the rationales for buying impression-based ads is the "branding," or "awareness," effect. If your advertising agency recommends creating an awareness study after you run the ads, you can rest assured you're being pulled down this path. The quest for "awareness" is fast losing support in Internet land. As Intuit founder Scott Cook eloquently put it at a recent conference, "Great brands are earned, not bought." Customer experience is where brand is built, not in the marketing budget.

The prevailing reason that companies will buy Internet advertising based on performance instead of impressions is because they have the data to make a more informed decision. Simply put, we can now acquire much more information in the advertising process than ever before. Companies such as DoubleClick, Personify, Coremetrics, Broadbase Software and many others are helping ad buyers rationalize their purchases. The first step is to use this data to analyze past behavior. The second step is to show the content sites what their ad space is really worth. Undoubtedly, we will have only more information in the future.

Of course, the biggest catalyst in the past 90 days has been the closing of the IPO market and the subsequent focus in the start-up world on profits and cost controls. This abrupt and refreshing change is a major accelerator that immediately tightens the belt of most Internet marketing departments and targets their spending on the most efficient forms of advertising they can find. Gone are the days when companies indiscriminately bought the "anchor tenancy" on the favorite portal just as a branding event.

From the ground level of the Internet, it is apparent that dollars are aggressively shifting away from large CPM-based deals with tier-one portals. With capital no longer an unlimited resource, these deals are nearly impossible to justify, and many dot-coms are doing everything they can to unshackle the ball and chains from their ankles. So far, I get the sense they are being successful. I have no way of knowing whether these dollar shifts are large enough to affect the overall financial performance of these players, but I suspect that investors are asking a lot of questions.

So where are the dollars moving? While large impression-based deals are being canceled, "per click" and "per sale" deals are flourishing. Some of the second-tier portals and search sites are willing to do performance-based programs, and they are getting an increasingly larger percentage of the ad budgets as a result. More and more, our companies are finding strong ad partnerships with companies such as GoTo.com and iWon, two high-traffic sites that embrace these types of ads. In addition, there is a rise in CPC (cost per click) ad networks, and from what I hear, companies in this market (such as ValueClick) are doing extremely well.

The bottom line is this: If media companies want to have long-term, sustainable relationships with their customers, they need to establish win-win contracts. Otherwise, they will be stuck in a "churn and burn" mode where they constantly are in search of new ad dollars. One of our companies has successfully scaled down two impression-based portal deals and has simultaneously engaged in an exciting new performance-based deal with a third. Ironically, we are spending more money with the new partner than on either of the other CPM-based deals. Of course, the cost of acquiring a new customer through this form of advertising is less than 10 percent of what companies spend for customers through CPM. That's math that works for everybody, and a model for the future.

Some purists will suggest that because radio, television and most print are still sold on an impression basis, the same practice will continue for the Internet, too. The truth is that if we had perfect information in these markets, the ads would be performance-based as well. Others may suggest that the availability of information may not necessarily affect spending (the typical "brand" argument). This is similar to suggesting that the advent of the sextant wouldn't affect sailing.

Posted by Bill Gurley on July 10, 2000 at 08:00 AM | Permalink | Comments (0)

DISCLOSURE: The information contained Above the Crowd has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice. The author is a general partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark Capital and its affiliated companies and/or individuals may have economic interests in the companies discussed herein. © J. William Gurley 2005-2006. All rights reserved.